The U.S. dollar hit its highest in nearly two years on Tuesday, boosted by hawkish comments from Federal Reserve officials who pushed for a quick reduction in the central bank’s bloated balance sheet, with one of them expressing openness to hefty rate increases of half a percentage point.
The dollar index rose as high as 99.526, the highest since late May 2020. It was last up 0.5% at 99.498.
Fed Governor Lael Brainard, usually one of the Fed’s more dovish policymakers, said on Tuesday she expects methodical interest rate increases and rapid reductions to the Fed’s nearly $9 trillion balance sheet to bring U.S. monetary policy to a “more neutral position” later this year. Further tightening will follow as needed.
Kansas City Fed President Esther George, a voting member of the Federal Open Market Committee, also in remarks on Tuesday supported a rapid run-off of the Fed balance sheet, and said as well that “50 basis-points is going to be an option that we’ll have to consider.”
“The dollar’s moves were primarily a function of Brainard’s hawkish comments today. She was very clear on two things,” said Erik Nelson, macro strategist at Wells Fargo Securities in New York.
“One, the Fed wants to reduce the balance sheet quite aggressively and much more quickly than the last cycle. And two, the Fed is really open to a 50-basis point hike and could do so at any point over the next few meetings. This is the kind of language that you don’t see from many Fed officials, especially Brainard,” Nelson added.
The dollar rose 0.7% against the yen to 123.63 yen after earlier hitting a one-week peak of 123.66. On March 28, the dollar soared to 125.105 yen, the highest level since August 2015.
The euro, on the other hand, struggled amid concerns about the outcome of the French elections. It was down 0.6% at $1.0901 and matched a low of $1.09 hit on March 14. Just days earlier amid increased optimism over an end to Russia’s invasion of Ukraine, the euro rose to a one-month high of $1.1185
President Emmanuel Macron is still ahead in opinion polls but his far-right eurosceptic rival Marine Le Pen has been closing the gap, and a poll on Monday put victory within the margin of error, unnerving investors ahead of the French presidential election’s first round on Sunday.
Worries about the French elections have prompted traders in the euro to buy put options around $1.07-$1.09 for end-April expiry, Refinitiv data shows.
Expected price swings for the euro, or implied volatility, climbed to three-week highs as traders braced for more sanctions.
In other currencies, commodity units rallied led by the Australian dollar, boosted by the prospect of policy tightening by the Reserve Bank of Australia (RBA).
The RBA dropped its pledge to be “patient” on tightening policy, while holding the key rate at a record low for now, as was expected. The New Zealand and Canadian dollars, as well as the Norwegian crown, rose in tandem with the Aussie currency.
The Aussie dollar rose 0.4% to US$0.77521, while the New Zealand dollar gained 0.2% to US$0.6937.
“We’re starting to see monetary policy elsewhere catch up with the Federal Reserve,” said Simon Harvey, head of FX analysis at Monex Europe, in London. “The general belief on current Fed pricing is that it is pretty well-priced and there isn’t much room to ratchet expectations higher.”